The Deflation Caucus

On Thursday, the European Central Bank announced a series of new steps it was taking in an effort to boost Europe’s economy. There was a whiff of desperation about the announcement, which was reassuring. Europe, which is doing worse than it did in the 1930s, is clearly in the grip of a deflationary vortex, and it’s good to know that the central bank understands that. But its epiphany may have come too late. It’s far from clear that the measures now on the table will be strong enough to reverse the downward spiral.

And there but for the grace of Bernanke go we. Things in the United States are far from O.K., but we seem (at least for now) to have steered clear of the kind of trap facing Europe. Why? One answer is that the Federal Reserve started doing the right thing years ago, buying trillions of dollars’ worth of bonds in order to avoid the situation its European counterpart now faces.

You can argue, and I would, that the Fed should have done even more. But Fed officials have faced fierce attacks all the way. Pundits, politicians and plutocrats have accused them, over and over again, of “debasing” the dollar, and warned that soaring inflation is just around the corner. The predicted surge in inflation has never arrived, but despite being wrong year after year, hardly any of the critics have admitted being wrong, or even changed their tune. And the question I’ve been trying to answer is why. What is it that makes a powerful faction in our body politic — call it the deflation caucus — demand tight money even in a depressed, low-inflation economy?

One thing is clear: Like so much else these days, monetary policy has become very much a partisan issue. It’s not just that talk of dollar debasement comes pretty much exclusively from the right of the political spectrum; inflation paranoia has, to a remarkable extent, become a matter of conservative political correctness, so that even economists who should know better have joined in the chorus. So we can focus the question further: Why do people on the right hate monetary expansion, even when it’s desperately needed?

Another answer is class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors, to have money in the bank and bonds in their portfolio rather than mortgages and credit-card balances outstanding. Back in the Gilded Age, the elite mobilized en masse to defeat William Jennings Bryan, who threatened to take the United States off the gold standard; campaign spending as a percentage of G.D.P. was far higher in 1896 than in any presidential election before or since. Are the wealthy similarly mobilized against easy-money policies today?

As far as I know, we don’t have rigorous evidence to that effect. There are certainly a lot of wealthy investors in the debasing-the-dollar crowd, but we don’t know for sure how representative they are — and you could argue that big investors should like the Fed’s expansionary policies, which have been very good for the stock market. But the wealthy may not trust that connection, in part because the inflationary ’70s were very bad for stocks. And we do know that the very wealthy are much more likely than the general public to consider budget deficits our biggest problem, even though fiscal austerity is probably bad for profits. So perceived class interest is probably also a key motivation for the deflation caucus.

A side note: Europe’s wealthy aren’t as wealthy or influential as their American counterparts, but creditor interests are nonetheless even more powerful than they are here because creditor nations, Germany in particular, have ended up dictating policy for the whole of Europe.

And the important thing to understand is that the dominance of creditor interests on both sides of the Atlantic, supported by false but viscerally appealing economic doctrines, has had tragic consequences. Our economies have been dragged down by the woes of debtors, who have been forced to slash spending. To avoid a deep, prolonged slump, we needed policies to offset this drag. What we got instead was an obsession with the evils of budget deficits and paranoia over inflation — and a slump that has gone on and on.